The Dynamics of Innovation (superseded by DP #1546)
We analyze social learning and innovation in an overlapping generations model in which available technologies have correlated payoffs. Each generation experiments within a set of policies whose payoffs are initially unknown and drawn from the path of a Brownian motion with drift. Marginal innovation consists in choosing a technology within the convex hull of policies already explored and entails no direct cost. Radical innovation consists in experimenting beyond the frontier of that interval, and entails a cost that increases with the distance from the frontier, and may decrease with the best technology currently available. We study how successive generations alternate between radical and marginal innovation, in a pattern reminiscent of Schumpeterian cycles. Even when the underlying Brownian motion has a positive drift, radical innovation stops in finite time. New generations then fine-tune policies in search of a local optimum, converging to a single technology. Our analysis thus suggests that sustaining radical innovation in the long-run requires external intervention.
|Date of creation:||09 Dec 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
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